The Siren Song of Patent Protection

The big pharmaceuticals, (notoriously inept) J&J, Pfizer, Merck, Glaxosmithklein and others are laying off left and right and chattering loudly about their financial woes. To get a glimpse of just how self-destructive and out of touch with their core value proposition many of them are, you might want to read this tale of ineptitude concerning Pfizer that appeared on CNN/Fortune.

The basic pharmaceutical business model is to pour a lot of money into R&D and jump over endless hurdles set before them by government regulators. When one of those research projects pays off in the form of an effective drug, it is made in a company factory focused on cheap for seven years until the patent runs out. Poor folks in the Caribbean are the most frequent choice to work in their factories, although they do quite a bit of it in mediocre plants in the USA, as well. Then the generic makers move in and the Big Pharm falls back on brand management, advertising and name recognition to induce eople to buy their version of the drug, rather than the generic or private label version made with the exact same ingredients in what is typically a much better run factory.

What is particularly interesting about them is that they are the living, breathing model of an industry driven by innovation. They live – and quite often lately – die by innovation. The justification for the patent protection is to give them an opportunity to recover their investment in R&D. They get the whole swimming pool to themselves for a period of time. No competition allowed. But that sweet sound of making money without having to work very hard at it lures them onto the rocks.

I would not think of denying them the right to their intellectual property. They paid the money, took the risk, came up with the wonder drug – they deserve to profit from it.

They might want to stp and think, however, of the unintended consequences of having no competition. There is absolutely no reason for the generics to even exist – except for lousy manufacturing management on the part of the big pharms. If they knew what they were doing, that seven years should be spent refining, honing and continuously improving their manufacturing processes to the point that no one could come close to their cost, quality and delivery capability after the patent ran out. Instead, they spend the seven years looking for cheap labor and ways to cut every manufacturing corner they can, and are easy prey for the generics.

This short sighted view – making hay while the patent sun shines brightly, giving scant thought to what happens next – is hardly limited to the pharmaceuticals. they just happen to be excellent examples. In fact, my first non-traditional job was to go into Cincinnati Microwave as part of a turn-around team. Just like the pharmaceuticals, they invented the radar detector and enjoyed an all too short opportunity to basically print money. Then competition showed up and the party was over.

It happens over and over and we have come to accept the silly notion that the entrepreneurs who create things are inherently unsuited to run the thing they have created after it is built. I'm quite sure the psychiatric community has found no proof of that particular theory. In fact, Ford, Proctor & Gamble, Kraft, Sherwin Williams, Armstrong, Andersen Windows, Boeing,Westinghouse, Northrop Grumman, Weyerhauser, Broyhill, Cessna, Deere, Harley-Davidson, and Parker Hannifin are all companies that were named for the innovators who created them and were run by those guys quite successfully for a long time – and are still around today. The difference between them and the big pharms is that they did not stop with their original technology – and rely on marketing hype and numbers games to continue their success. The common trait is that every one of them followed their invention with continuously improving both the inventions and the processes for making them.

Innovations are great. Patents are well deserved. But they both have a limited shelf life. Excellence in the long term can only come from continuously improving the value of the product.

Well done.
Once the notion of the patent period being used to improve, and set up an innovation to have a long life, rather than just print money in the short term protected environment, it is pretty obvious, but it had not occurred to me.
It applies all over, as you say, success is a function of leveraging the advantages that come from hard work, and insight. It rarely comes from luck.